Obama Budget Limits Some Retirement Savings Tax Breaks

It would limit the tax rate at which high-income
taxpayers can reduce their tax liability to a maximum of 28%, affecting only
married taxpayers filing a joint return with income greater than $250,000 and single
taxpayers with income greater than $200,000, according to news reports. This
limit would apply to all itemized deductions, foreign-excluded income,
tax-exempt interest, employer-sponsored health insurance and retirement
contributions.

Also in the budget is a provision that would eliminate
required minimum distributions for people who are at least 70½ years old whose
tax-deferred retirement plan balances do not exceed $75,000.

In addition, the proposal provides a few more details on
a recommendation to target military retirement benefits as a source of savings
by establishing a commission to review them. According to the administration’s
proposal, the Department of Defense would transmit—to a presidentially
appointed commission—initial recommendations on how to change the military
retirement system (see “DoD
Panel Proposes Retirement Benefit Change for Troops“). The commission
would hold hearings, make final recommendations and draft legislation to
implement its recommendation.

President Obama would again weigh in on the commission
recommendations and send them to lawmakers. The proposal would also include
“grandfathering provisions” for current retirees and active-duty members.

In a statement, Brian H. Graff, executive director/CEO of
The American Society of Pension Professionals & Actuaries (ASPPA), said:
“President Obama’s proposals to limit the tax benefit for retirement savings
for families earning over $250,000 is a bad proposal based on bad math. Unlike
other targeted tax incentives, the tax break for retirement savings is a deferral,
not a permanent write-off.”

Graff continued, “Under the President’s budget, these
taxpayers wouldn’t just lose a current tax break, they would actually be
penalized for saving—paying taxes now and taxes later. This will discourage
small-business owners from setting up or maintaining retirement savings plans
for their employees. Workers that lose workplace retirement savings plans will
be the ones that really pay for this misguided proposal.

“Under current law, there is already a $250,000 cap on
compensation that can be used to calculate contributions to 401(k) plans. The
President’s proposal effectively doubles down on this limit for 401(k) plans,
and takes an axe to the tax incentives that encourage small-business owners to
offer these types of plans at work.”